Trusts – The Swiss Army Knife of Estate Planning

Oct 24, 2018 | Estates Planning and Asset Protection

To the general public, a trust may seem like an advanced tool only for the wealthiest among us. But, the reality is that trusts are a foundational estate planning tool with a solid history for being highly effective in ensuring a person’s wishes are carried out. The process begins with the maker of a trust – commonly referred to as the trust maker, grantor, settlor, or trustor – transferring his or her ownership of certain assets to the trust. A trustee is then appointed to manage these assets for the beneficiary (or beneficiaries) of the trust. In a “standard” revocable living trust, you are the trust maker, the trustee, and the beneficiary while you are alive. Then your designated successor trustee and beneficiaries take over upon your passing.

Types of Trusts

There are a broad variety of trusts and options available to you to fit your estate planning needs – no matter what they are.

  • Revocable Living Trusts. These trusts are the foundation of many estate plans. They contain your instructions for how your assets will be handled upon your death or incapacity, which go into effect while you are still living. Since these trusts are revocable, you can change or cancel provisions at any time during your life.
  • Incentive Trusts. These trusts typically contain provisions to encourage or discourage certain behavior and promote family values. In order for the beneficiary to receive funds from the trust, he or she must adhere to the particular requirements set forth by the grantor.
  • Beneficiary Controlled Trusts. In this scenario, the beneficiary – typically the grantor’s child or grandchild – is also the trustee. He or she has the discretion to distribute assets to him or herself for health, maintenance, education, or support. There is a co-trustee, who can be removed by the beneficiary/trustee, with the authority to access the trust for the benefit of the beneficiary beyond his or her health, maintenance, education, or support.
  • Asset Protection Trusts. These trusts offer perhaps the strongest financial protection against creditors, lawsuits, and judgments. In some types of asset protection trusts, the trust maker can also be a beneficiary, allowing him or her to still receive the benefits of the assets. Protective legal language and proper management of the trust are critical when you use these trusts.
  • Offshore Trusts. An offshore trust is similar in nature and effect to other trusts, except that it is generally created in a jurisdiction where the laws are more favorable to settlors looking for privacy and asset protection. Notably, as long as the jurisdiction recognizes the legal concept of a trust, a trust may be located in any country. That being said, these trusts are subject to close scrutiny and extensive reporting requirements imposed by the U.S. government. As a result, they are really only appropriate for sophisticated, high net worth individuals, couples, and families.
  • Life Insurance Trusts. This is an irrevocable trust that is set up specifically to own a life insurance policy. Ownership in an existing life insurance policy may be transferred to the trust or the trust can purchase the policy directly. The settlor cannot serve as the trustee and he or she relinquishes any right to dissolve the trust or make any changes to it. These can be a great fit for anyone with a large life insurance policy and whose estate is subject to estate taxes.
  • Testamentary Trusts. This trust does not become effective until the grantor passes away. Testamentary trusts are generally made within a will. The will becomes effective immediately, but the trust is not created until the maker of the will dies. Unlike living trusts, testamentary trusts do not avoid probate – the legal process by which a court oversees the distribution of assets from a deceased’s estate.
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